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NPV

NPV

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Break-even calculations are most often concerned with the effect of a shortfall in sales, but they could equally well focus on any other component of cash flow. Dog Days is considering a proposal to produce and market a caviar- flavored dog food. It will involve an initial investment of $90,000 that can be depreciated for tax straight-line over 10 years. In each of years 1-10, the project is forecast to produce sales of $100,000 and to incur variable costs of 50% of sales and fixed costs of $30,000. The corporate tax rate is 30%, and the cost of capital is 10%. a. Calculate the NPV and accounting break-even levels of fixed costs. (Do not round intermediate calculations. Round your answers to 2 decimal places.) FC at NPV breakeven FC at accounting breakeven b. Suppose that you are worried that the corporate tax rate will be increased immediately after you commit to the project. Calculate the break-even rate of tax. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Break-even tax rate c. How would a rise in the tax rate affect the accounting break-even point? No effect Decrease Increase
Transcribed Image Text:Break-even calculations are most often concerned with the effect of a shortfall in sales, but they could equally well focus on any other component of cash flow. Dog Days is considering a proposal to produce and market a caviar- flavored dog food. It will involve an initial investment of $90,000 that can be depreciated for tax straight-line over 10 years. In each of years 1-10, the project is forecast to produce sales of $100,000 and to incur variable costs of 50% of sales and fixed costs of $30,000. The corporate tax rate is 30%, and the cost of capital is 10%. a. Calculate the NPV and accounting break-even levels of fixed costs. (Do not round intermediate calculations. Round your answers to 2 decimal places.) FC at NPV breakeven FC at accounting breakeven b. Suppose that you are worried that the corporate tax rate will be increased immediately after you commit to the project. Calculate the break-even rate of tax. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Break-even tax rate c. How would a rise in the tax rate affect the accounting break-even point? No effect Decrease Increase
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